In the United States, there is an intellectual movement going on the likes of which have not been seen in nearly a century. The administrative state, otherwise known as the “headless fourth branch of government,” is in a legitimacy crisis. Its very foundations are being challenged on multiple fronts. The past two justices appointed to the Supreme Court both espouse the view that significant portions of it are at odds with the Constitution. Prominent senators have introduced legislation to rein in its growth. And the Trump administration’s Department of Justice has rejected some of its most controversial practices.
Interestingly, while we share similar constitutional foundations, this movement challenging the legal basis of the administrative state has not yet reached Australian shores. But it should. Indeed, Australia’s administrative state, like America’s, is also largely contrary to constitutional text, history, and purpose.
As an Australian writing on the American administrative state, it has puzzled me as to why there is little conversation on these issues in my native country. That is why it is so refreshing to see a new report by Kurt Wallace from the Institute of Public Affairs titled “Regulatory Dark Matter: How Unaccountable Regulators Subvert Democracy By Imposing Red Tape Without Transparency.” As the title suggests, the report builds off the work of my colleague, Wayne Crews, on the use of guidance documents in the regulatory process, something that has been sorely needed in Australia for some time.
Wallace’s report makes a good start at accounting for the flurry of regulatory dark matter—regulatory guides, circulars, letters, and statements—published by agencies with little to no scrutiny or democratic accountability. For example, Wallace notes that from just five regulatory agencies there are eight times more pages of dark matter than enabling legislation. For a U.S. comparison, see Wayne’s Unconstitutionality Index.
It is true, as Wallace makes clear, that guidance can be a problem. However the problem, at least to my mind, rests less with the concept of guidance itself or even its aggregate amount, but whether it is used in an appropriate way. In the United States, the predominate problem with guidance is that it has too often improperly substituted for notice-and-comment rulemaking under the Administrative Procedure Act (5 U.S. Code § 553). This is where agencies use guidance not to ‘clarify’ or ‘interpret’ regulation, but to change or create it outside of the APA’s prescribed process. That is to say, agencies inappropriately use guidance to do what rulemaking is statutorily meant to do.
This, however, gets to a much broader problem: America has an Administrative Procedure Act. Australia, to my knowledge, does not have an equivalent. That is why guidance actually means something in America because it is an exemption to an otherwise formal and rigorous rulemaking procedure.
In Australia, it appears that both legislative instruments and quasi-regulatory actions are “dark matter,” because neither are promulgated in a transparent, accountable, and rigorous manner. It is true that legislative instruments go through parliamentary review, but this process does not impose the same kind of procedural scrutiny as the APA. In other words, everything is dark matter, because nothing is a rule. This is the kind of problem that the APA was designed to solve in 1946.
The real issue, of course, is Congress and Parliament. Fundamentally, they should not be delegating their lawmaking powers to the executive branch in contravention of the respective constitutions’ separation of powers. The legislative branches should be the ones legislating with greater precision and clarity. The problem, however, at least in the United States, is that the Supreme Court has largely given up on invalidating laws on non-delegation grounds, the last time being Panama Refining Co. v. Ryan and Schechter Poultry v. United States in 1935. Therefore, it may be tactically better to build up new institutions governing how agencies use that power rather than trying to tear down the power itself.
It seems that Australia could benefit from a similar treatment. If Parliament is going to delegate vast swaths of legislative power to the executive, then it should at least place some constraints on the use of that power. A formalized American-style regulatory process grounded in deliberative democracy, due process, and judicial review could be beneficial to taming the administrative state, or at least channelling its actions in a beneficial direction.
The difference between the two systems can be seen in legislation recently passed by the Commonwealth government. In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Australian parliament passed sweeping new legislation, known as the Design and Distribution Obligations and Product Intervention Power, to empower the Australian Securities and Investment Commission (ASIC) to proactively intervene in financial markets to alter the terms and conditions of contracts and even ban products outright.
Interestingly, this vast power seems to be in part modeled off of the U.S. Consumer Financial Protection Bureau’s power to prohibit “Unfair, Deceptive or Abusive Acts and Practices” (12 U.S. Code § 5531). The 2014 Murray Inquiry into financial services, for example, suggests that it wouldn’t be unusual for ASIC to exercise such a power, as the CFPB has a similar power. But what the inquiry fails to acknowledge is that CFPB is both bound by the APA’s rulemaking and adjudicatory procedures as well as its own organic statutory requirements to conduct cost benefit analyses when issuing rules (12 U.S. Code § 5512 (b) (2) (A) (i)).
While the CFPB’s power to intervene in financial products and markets is subject to regulatory due process and judicial review, ASIC’s new, vast power contains few constraints. For example, there is a provision regarding “mandatory consultation” with the public before issuing an intervention order, but a failure to comply with the requirements does not invalidate the order, so it is effectively toothless. There are also few, if any, formal requirements for evidentiary findings in an intervention order, such as whether or not an agency’s conclusions are arbitrary, capricious, or an abuse of discretion. And at least on its face, judicial review of ASIC’s decisions are limited.
In contrast, the APA requires that agencies go through notice-and-comment rulemaking when issuing regulations. It further empowers courts to check agency action. The APA’s scope of review (5 U.S. Code § 706 (2)), for example, allows a court to hold unlawful and set aside agency action for being arbitrary, capricious, an abuse of discretion, in excess of statutory jurisdiction, or unwarranted by the facts, amongst other things. While a powerful tool, this is by no means perfect. Judicial review of administrative action remains highly deferential to an agency. Chevron deference applies to ambiguous statutes. Auer deference applies to ambiguous regulations. Vermont Yankee struck down the “hard look” review standard employed by some lower courts. And Whitman and a host of other cases eviscerated non-delegation principles.
But to restate the point made earlier, if Parliament is going to delegate clear and vast lawmaking powers to agencies, then they should do a better job of ensuring that those powers are not used in a manner that is arbitrary or detrimental to the rule of law. They should engage in a more deliberative form of regulatory due process, as University of Sydney law professor Andrew Edgar has argued. Further, as Kurt Wallace’s report seeks to do, by then defining both the procedural and substantive aspects of a regulation, one could discern whether or not sub-regulatory or quasi-regulatory guidance documents are utilized in the correct way.
The APA is far from perfect. It could be much improved upon by the Regulatory Accountability Act, for example. But at least it provides some restraint on agency action and some guarantee of deliberative democracy. That is more than can be said for Australia. Indeed, Australia could do with an Administrative Procedure Act to ensure that the lawmaking powers delegated to agencies are exercised in a transparent and accountable manner.